A particular youtube video has recently been gaining quite a host of supporters - I'm sure many of you have seen the link next to a friend's declarations of admiration on facebook and some of you might have even watched it. If you don't know what I'm talking about, then I encourage you to watch the video here http://www.youtube.com/watch?v=QPKKQnijnsM. Now that you've seen it I'd be interested to see your thoughts about it, but first allow me to inundate you with my own.
This video brings up some very important social issues that should be important to everyone but I believe it's also full of subtleties and implications that are based on something other than sound economic principle. From the start it's important that I make clear that I am far from an expert on economics, in fact the extent of my understanding comes from a single, entry-level, general education class on macroeconomics and personal experience. Luckily for us, every American has claim to the latter and as such, each individual's opinion should be important in deciding the policies and practices that are characteristic of the economic machinery of our country. This belief brings me to my first point - the current political system is broken. Everyone has probably heard this a million times and thought it themselves as well, but most likely it's almost always accompanied by a condemnation of politicians, executives and powerful people. We as a people are quick to recognize the inability of congress to get anything done but blind to the fact that we empower and elect the type of people who promise not to compromise. This of course is a large topic so I won't divert too much attention to it, but it relates obliquely to the subject at hand through the attitudes of some people who viewed the video, then commented about it. It seems that an increasingly large number of people are insistent that every position that doesn't agree with theirs is idiotic and wrong and everyone who espouses such opinions must be ignorant and sometimes even undeserving of respect. I have sometimes been one of these extremists and will try not to be in this discussion.
You may well be thinking what could possibly be subtle in that video!? It's just a bunch of bar graphs showing the wealth distribution in America right? Hopefully a few simple questions will illustrate my point. What is wealth? How do you measure an individual's wealth (I'm not speaking spiritually or emotionally here - literally material wealth)? Is wealth a limited resource? Does one person having wealth mean another doesn't have it? There's plenty more where that came from too. Does that begin to paint a larger and more complicated picture than what's portrayed in the video? If not I've failed.
Before we even start discussing those questions in earnest let's first consider statistics. It should be easy to understand that this video (and any presentation of statistics for that matter) is meaningless without a good explanation of how they arrived at their conclusions. Statistics cannot stand alone - we need to know how large their sample was, how they chose their sample, and how representative their sample was of America. We also need to know what they considered wealth and how they counted it. In other words did they count every minutia of every American's wealth? I highly doubt that they did and I also have serious doubts that anyone is really privy to such information. So without an understanding of where they came up with their information we should all be cautious about sinking all of our stock into it.
If that were my only point this would be a rather vacuous (got that one straight from the thesaurus) synopsis. For the sake of continuing, therefore, let us assume that all of the bar graphs are a true representation of reality and that there is nothing misleading or inaccurate about the presentation - not too terribly far-fetched. As mentioned, this assumption would subsume at least representative sampling and the ability to accurately measure and quantify wealth. In this case, I agree with the main thrust of the video that income inequality, especially to that extreme, is a problem, but at this point I'm going to step out on a limb and interpret the intent of the author, or perhaps just the conclusion of a lot of people that liked the video. I sensed an air of "we need to redistribute the wealth" - we should take a few columns of green off of that 1% guy's stack and start spreading it over the lower quadrants - this is what I have a problem with. If anyone had a different impression or interpretation please let it be known. Furthermore, when the narrator was introducing the results of the poll in the beginning he said something about the difference between people's ideal and their prediction of reality was based on their belief that the "system" was skewed. If I understand correctly those polled were asked about numbers alone - not their justification, so for the author to conclude that Americans believe the system is skewed, is more a reflection of his own opinion than anything else. This opinion of the author is the second point that I take issue with. So for all the people out there who were wondering about my opinion on wealth inequality I'll make it explicit: it IS a problem, it is not necessarily caused by the system and government sponsored redistribution is not a solution.
One more diversionary point must be discussed before moving on to clarifying those opinions. It seems to me that we (notice the inclusion of the first person) fail to grasp what's really going on here with all of this wealth. The video says something about the top one percent having "so much green in his pockets" - nothing could be further from the truth! Where is the wealth of America's richest people? Where is your wealth? If you answered, "It's in my pockets" then I'm forced to say that you're a fool with money, unless you are one of the few on the very low side of the wealth ladder whose entire fortune fits in your pocket. Again, it would be nice to know what the definition of wealth was for the purpose of these metrics, but in any case, whether only liquid assets (cash, and bank accounts) were counted or all assets (including houses, cars, yachts, real estate, etc (use your imagination)) the same principle applies - one person's wealth is another person's wealth. This can be a real mind bender if you're attached to the idea that your wealth is yours, but at the same time this should come as no surprise. Almost all of your "money" in the bank is actually somewhere else being counted as wealth. The guy across town gets a loan from your bank and buys a car - so now you're still counting it as your wealth but so is the car salesman, and all the factory workers who built the car. The extremely rich have investments - they count the value of their investment as wealth but the companies that they're invested in used that same wealth long ago to pay their suppliers. You might also have a house, you count some portion of that as your wealth but so does the contractor and all his workers. I think the point is pretty clear. So when we see the giant stack of cash stacked over the 1% guy's head we must remember that it might be the same cash stacked over everyone else's head too. That's just downright confusing isn't it? So how much wealth is there out there really? After thinking about it (again I stress that I'm not an economist) I've come to the conclusion that wealth is just a measure of economic activity which in turn is some extremely complex function of an unknown number of variables like buyer's confidence, ambition and technological advancement. So should we really be upset that a couple people are so rich? We definitely should be if their having implies another's not having but it isn't so - the GDP is theoretically unbounded! On the other hand, it is definitely a problem without any qualifications that so many people have so little wealth, but in my opinion it doesn't have that much to do with the top 1% having so much.
Some of you reading this might have thought that I would make it through a whole post without bringing up Chemistry... you were wrong. The more I think about it the more wealth and the economy is like chemistry. Wealth could be like energy, and all of us people are like the millions of molecules and atoms that pass energy around amongst ourselves. In both cases it is almost impossible, and really quite meaningless to talk about a single entity - in a sea of molecules it doesn't really mean anything if a single molecule has a thousand times more than another molecule because energy is being transferred so much and so frequently. Likewise it doesn't mean a whole lot to say that one man in America has a billion times more wealth than another because in all reality both men are counting the same wealth. To help deal with this problem in Chemistry we use macroscopic characteristics like temperature and pressure that help us characterize the state of the ensemble. I presume it's the same in economics. One macroscopic phenomenon in Chemistry is called equilibrium - certainly you remember from your high school chemistry days that equilibrium is the state of the ensemble where no overall change is occurring, yet if you looked at a single particle in the ensemble there is still a lot going on. Even though individual molecules are still colliding, reacting, transferring energy, and undergoing all kinds of motion and change, the whole ensemble is static - concentrations stay the same as do all of the macroscopic properties such as temperature, pressure and volume. I like to think that there is a similar state of the economy - a static state, a natural state so to speak. In order to understand the economy as a whole we can't look at individuals, we have to see the whole picture. Now here's the difference - the chemical universe for a particular problem might well be approximated by the contents of a single beaker but in economics there is absolutely no way to uncouple a part of the problem from the whole, and in order to truly understand it we absolutely have to see the whole thing. In other words don't plan on ever understanding the economy and don't plan on anyone, ever accurately predicting the evolution of the economy.
What then is the cause of the poverty problem in America? I don't intend to answer that question - I only intend to drum up reasonable doubt against the claim that it's the greed of the richest of the rich, or the bias of "the system". In fact I would argue that it's greed and covetousness that inspires some people who claim altruistic motives to desire to take from the rich, but again that's another issue altogether. Once again I've made an assumption about the opinions of the authors, viz. that their "system" is somehow connected with the government. If they're conspiracy theorists then they probably believe the system is controlled by the government, if they're your average fans of wealth redistribution then they probably think the system is the violent dog that the government refuses to lock up. So what role does government play in the economy, or in the pocketbooks of the people? This question is certainly more than I can chew but I implore all rational people to think critically about whether or not the government has done something to funnel money to the extremely rich? In my thoughts I see that the wealth of every individual ultimately comes from those around him/her. Let me illustrate what I mean. Someone builds up a business venture dedicated to vacation properties and becomes one of the richest men in the world. Why did this happen? Could it be that his wealth is a reflection of societies attitudes and values? Is it possible that rather than people being victims of the few richest people, the few richest people are a product of people's desires and values. Some of you might be thinking though that America's tax code disproportionately burdens the poor and middle class, thus supporting the rich's efforts to amass wealth. That is an issue worth discussing but is wealth redistribution through taxation really plausible?
This brings us back to chemistry. Now that you remember equilibrium you might also remember Le Chatelier's principle. If not, it can be summed up in the following statement: a system will naturally undergo the changes necessary to achieve equilibrium. For example equilibrium of a certain reaction is characterized by a certain ratio of products and reactants. If you change the system by adding more reactant, then the ratio of products and reactants will change too. Almost immediately, the system will do whatever is necessary to bring the ratio of products and reactants back to the equilibrium value. What if the economy were the same - suppose we are at equilibrium now as defined by all the macroscopic economic variables (confidence, ambition, greed, etc.) and suddenly the government takes a huge amount of money from the richest few percent. What will happen? If the original cause of the income inequality was anything other than chance, or institutional order, then is it not likely that the system would promptly return to equilibrium? If we take a huge amount of money from a bunch of powerful, intelligent and possibly greedy people will it not find it's way back? If we give that huge amount of money to the poorest few percent without making any other changes is there any guarantee that the changes will have a long term effect?
What about WAGE inequality? The fact that executives make three hundred and something times more than their average employee? As before, I agree that this is problematic but the real question again revolves around the true cause. Is the government somehow responsible for encouraging top heavy salary schemes? As before I think the sad truth is that we the people are responsible. I honestly believe that the reason executives make so much is because overtime society has allowed it and encouraged it. Suddenly some people are starting to realize that we've made a mistake and they start shouting about how horrible it is but there are people far and few between who really hold the moral high ground on the issue - society is replete with greed. Who sets the executives pay? Again I'm not the expert but I think oftentimes it's the board not the executive himself. In another vein, but still related to wage inequality, the problem might be totally unrelated to the poverty problem. This would be unfortunate for the supporters of redistribution because it would mean that simply regulating executives wages would not affect the poverty problem. We would need to determine how many "poor" people work for those CEO's whose incomes are grossly inflated before we can really say whether this is the problem. What if there is a huge number of businesses in the finance sector where none of the employees are really struggling to make ends meet yet the executives are making 1000 times more than their average employee (in other words the executive is extremely rich), while on the other hand there are many other companies where the average worker is poor and the bosses make a little bit more but are really just eking out a modest living for themselves and their family. Statistically, this might look the same as if executives in every business everywhere in America were making three hundred and something times more than their average worker, but the situations are worlds apart. Would insisting that executives' wages be comparable to their employees' really help the poor people much if that were the case? So we see that wage regulation isn't necessarily a good answer.
In summary, I hope that I have proved absolutely nothing. Hopefully after reading this you will have nothing but a long list of questions about the economy, wealth and income. Most likely they will be questions that don't have an answer - even from the educated economists. At that point hopefully we will be one step closer not to the "right" answer of how to regulate economic affairs in America, but rather to the table of a discussion on how to really assist individuals who are poor and stimulate and encourage a strong foundation of morals and values in EVERY American, not just those greedy CEO's.
PS I liked this editorial in the New York Times that follows some of the themes discussed here
http://www.nytimes.com/2013/03/19/opinion/brooks-the-progressive-shift.html?_r=0
PPS Lest any be confused, I'm an equal opportunity condemner so whenever gender was defined in my discussions of the CEO of a company, or of a greedy rich person, the opposite gender could be equally well substituted.